Cash Converters hit by micro-lending legislation

Payday loan company Cash Converters has seen shares plunge 40 per cent after key American stakeholder EZCorp pulled out of a $70 million deal to buy another 20 per cent.

Transcript

TICKY FULLERTON, PRESENTER: Payday loan company Cash Converters is reeling today after its key American stakeholder, EZCorp, pulled out of a $70 million deal to buy another 20 per cent of the company, and all apparently because of draft legislation announced by the Minister for Financial Services Bill Shorten last week that sets new caps on fees for micro lending.

Shares in Cash Converters at one stage plunged 40 per cent to under 40 cents before closing at 48.5.

I spoke with managing director Peter Cumins.

Peter Cumins, welcome to Lateline Business.

PETER CUMINS, MD, CASH CONVERTERS: Thank you.

TICKY FULLERTON: Now obviously EZCorp thought that this draft legislation was going to impact growth at Cash Converters considerably. Just how much do you believe it could impact your bottom line?

PETER CUMINS: Well, from our point of view, the cap on fees and charges that's being promoted would cover cost at best.

TICKY FULLERTON: It is a huge difference. When I look at upfront fees, capped at 10 per cent for small loans under two years, and then a cap of two per cent a month, which is an annualised rate of 25 per cent - this is the legislation. And I understand you charge a flat fee of 35 per cent for a 30-day cash advance.

Now, that could be annualised at 425 per cent. That's a massive difference, isn't it?

PETER CUMINS: Look, APRs are not a relevant measure for short-term loans. It is a bit like quoting the gold price when you're buying silver. There's no relationship between an annual rate and a 30-day loan.

TICKY FULLERTON: You're saying that because it is uneconomic to offer short-term loans for any length of time, is that right?

PETER CUMINS: Correct. At those rates.

TICKY FULLERTON: Cash Converters I believe has grown 1,000 per cent, 10-fold, in the last decade, and I think the industry as a whole has grown exponentially in Australia. Do you - you still, though, believe that these sorts of cutbacks will cripple your business?

PETER CUMINS: It won't cripple our business because I want to make the point quite clear that being an international business, one option for us to redirect our capital into a market which is business friendly.

TICKY FULLERTON: I think you've suggested that one place you might focus your business on is the UK, where they don't have such draconian legislation from your point of view. Have you put this to Bill Shorten and what is his response?

PETER CUMINS: He's not particularly interested. He's made it very clear in this draft legislation that he intends to wipe out the micro lending industry. And it's very disappointing when during two years of negotiation with Treasury and the Government we were led to believe that he had no intention to do that. That's the reason that EZCorp withdrew from their transaction, because we led them to believe the same thing.

TICKY FULLERTON: Bill Shorten does provide several examples though of cases where people - I'll give you one he's offered up: someone who borrows $300 is charged over $100 for a seven-day loan and then can only meet the repayment by not paying other important bills - basic bills like electricity. And he believes that these sorts of people are being preyed on by people in your industry.

PETER CUMINS: Well that's rubbish. Um, this is typical, where you take the worst example and promulgate that as being the practice in hundreds and hundreds of thousands of transactions.

We're demonstrating through our no-cap program with our customers that that's not what they believe at all. In two days we've had 15,000 people contact us and had their photograph taken, participate in a - an online petition to say, "Mr Shorten, leave my credit alone. It's my choice."

TICKY FULLERTON: Critics again would argue that many of these people are vulnerable. They're just desperate for cash up front and they don't actually understand how much it is going to cost them over time, particularly with websites like yours where you actually have to apply online before you even see what the fees are.

PETER CUMINS: Again, that's absolute rubbish. We undergo the same disclosure regime for a $300 loan as you would if you were borrowing $100,000 from NAB.

Now, we had somewhere close to 500,000 transactions in the last financial year and we had 11 customer complaints with COSL. Seven of those were on behalf of consumer advocates testing our contract validity for customers. So we had four real complaints. It doesn't add up that what you're saying is the reality. But there's no need and no point in capping rates at a level that's not commercial. It's just prohibition by another name.

TICKY FULLERTON: Peter Cumins, we'll see what happens when that draft bill winds its way through and eventually becomes law. Thank you very much for joining us today.